Psychological

Optimism can be a very powerful thing. For a long time Americans believed that things would get better, and that caused them to take action to make things better, and that actually resulted in things moving in a positive direction. But now things have abruptly shifted. In late 2018, an increasing number of Americans believe that an economic downturn is coming, and they are taking actions consistent with that belief. As a result, they are actually helping to produce the result that they fear. And without a doubt, any rational person should be able to see that signs that the U.S. economy is slowing down are all around us. So it isn’t as if those that are preparing for the worst are being irrational. It is just that when large numbers of people all start to move in the same direction, it has a very powerful effect. We witnessed this in the stock market in recent years when people just kept buying stocks even though they were massively overvalued. The collective belief that there was money to be made in the stock market became a self-fulfilling prophecy which pushed stock prices up to absurd heights. But now that process is beginning to reverse as well, and ultimately the unwinding of that bubble will be quite painful.

Over the past couple of years the dominant economic narrative that the mainstream media was pushing was that the U.S. economy was “booming”, and this encouraged businesses to expand and consumers to go out and spend money.

But now the dominant economic narrative has changed, and businesses are starting to take actions that are consistent with the new narrative. In the retail industry, if executives truly believed we would see an economic boom in the years ahead they would be expanding, but instead stores are being closed at a record pace…

Mall and shopping center owners across the U.S. are preparing to be hit by more store closures, following a brutal year that included department store chains like Bon-Ton and Sears going bankrupt, Toys R Us liquidating and even Walmart shutting dozens of its club stores.

Now, a slew of specialty retailers like Gap and L Brands are getting serious about downsizing, which will leave more vacant storefronts within malls until landlords are able to replace tenants.

As a result of these store closings, large numbers of workers will be without jobs, vendors will not be receiving orders and mall owners will be without tenants.

In other words, economic activity will slow down.

Another sector where there has been a major psychological shift is in the real estate industry. Home prices have been falling all over the nation, and this includes markets that were once extremely hot such as San Francisco…

In San Francisco, the number of homes with a price cut in October nearly doubled, to 238 from 124 last October, according to data from Realtor.com.

That’s nothing compared to Santa Clara County, where the number of price cuts rose to 818 last month, more than six times last year’s number. Santa Clara County had been one of the nation’s hottest markets this year, and the Bay Area’s price appreciation leader until September.

“Clearly, there is a market shift,” said Rich Bennett, a Zephyr agent in San Francisco.

If homeowners believed that this dip was just temporary and that home prices would start surging again next year as the U.S. economy thrives, it would be quite foolish of them to slash their prices like this.

In some cases, home prices are being reduced by hundreds of thousands of dollars. Why throw all of that money away if the market is going to bounce back shortly?

Over in the auto industry, there has also been a noticeable psychological shift.

If the U.S. economy was going to be doing extremely well in the years ahead, the major automakers should all be gearing up for record sales.

“We estimate a large portion of Ford’s restructuring actions will be focused on Ford Europe, a business we currently value at negative $7 billion,” Jonas wrote. “But we also expect a significant restructuring effort in North America, involving significant numbers of both salaried and hourly UAW and CAW workers.”

Ford’s 70,000 salaried employees have been told they face unspecified job losses by the middle of next year as the automaker works through an “organizational redesign” aimed at creating a white-collar workforce “designed for speed,” according to Karen Hampton, a spokeswoman.

“These actions will come largely outside of North America,” Hampton said of Ford’s restructuring. “All of this work is ongoing and publishing a job-reduction figure at this point would be pure speculation.”

Shifting gears, let’s talk about agriculture.

If farmers believed that the trade war was just temporary and that things would soon swing back in their favor, many of them would keep trying to hold on for as long as they possibly could.

A total of 84 farms in the upper Midwest filed for bankruptcy betweenJuly 2017 and June 2018, according to the Minneapolis Star Tribune. That’s more than double the number of Chapter 12 filings during the same period in 2013 and 2014 in Wisconsin, Minnesota, North Dakota, South Dakota, and Montana, reported Vox.

Most Americans want to have hope, but when they look at our economic situation all they see is a very bleak future.

And in some parts of the nation, there still hasn’t been any sort of a “recovery” from the last recession. For example, a recent Bloomberg article took a hard look at what conditions are currently like in eastern Kentucky…

Tiffany Hensley’s drive home takes her through some picturesque scenery, and an ugly economy.

“The first thing you see when you get down here is beauty,” says Hensley, midway through her shift at a diner in the rolling hills of eastern Kentucky. “But then you get to looking around. It’s real rough.’’

Of course eastern Kentucky is far from alone. Yes, coastal cities such as San Francisco and New York have prospered in recent years, but rural communities all across America have been deeply suffering.

And now economic conditions are deteriorating once again nationally, and things are about to get a whole lot tougher for everyone.

Things continue to line up in textbook fashion for a major financial crisis by the end of 2015. This week, Wall Street has been buzzing about the first “death cross” that we have seen for the Dow since 2011. When the 50-day moving average moves below the 200-day moving average, that is a very important psychological moment for the market. And just like during the run up to the stock market crash of 2008, we are starting to witness lots of wild swings up and down. The Dow was up more than 200 points on Monday, the Dow was down more than 200 points on Tuesday, and it took a nearly 700 point roundtrip on Wednesday. This is exactly the type of behavior that we would expect to see during the weeks or months leading up to a crash. As any good sailor will tell you, when the waters start getting very choppy that is not a good sign. Of course what China is doing is certainly not helping matters. On Wednesday, the Chinese devalued the yuan for a second day in a row, and many believe that a new “currency war” has now begun.

So what does all of this mean?

Does this mean that the time of financial “shaking” has now arrived?

Let’s start with what is happening to the Dow. When the 50-day moving average crosses over the 200-day moving average, it is a very powerful signal. For example, as Business Insider has pointed out, if you would have got into stocks when the 50-day moving average moved above the 200-day moving average in December 2011, you would have experienced a gain of 43 percent by now…

The Dow Jones Industrial Average has been on an unrelenting upward trajectory since its October 2011 low.

The signal that convinced many traders that the market was now moving with a bullish bias was when the 50-day moving average of the index price rose above the 200-day moving average a couple of months later at the end of December.

Since then the market rallied 6,200 points to a high of 18,333 before pulling back to last night’s close of 17,404. That’s a gain of around 43% even though the market is 5% off its high.

But now a cross is happening in the other direction. That is why it is called a “death cross”. It is quite understandable why a lot of investors are freaking out about the fact that the 50-day moving average has moved below the 200-day moving average for the first time in four years. Every major stock market in history has been preceded by a death cross.

Of course no indicator is perfect. Sometimes these death crosses come just before market crashes, and other times nothing much seems to happen. The following comes from MarketWatch…

The 50-day moving average (or “MA”) crossed below a rising 200-day MA on July 7, 2010, when the Dow closed at 10,018.28. The Dow’s closing low for 2010 was actually hit two sessions earlier, at 9,686.48.

But the Dow fell another 5.9% over six weeks after the Aug. 24, 2011 death cross, and tumbled as much as 50% over 14 months after the one appearing on Jan. 3, 2008.

And keep in mind that when the January 2008 death cross appeared, the Dow had lost just 7.8% from its Oct. 9, 2007 peak. That means the bull market was still firmly in place, as the rule of thumb is a bear market is defined by a decline of at least 20% from a significant peak. In addition, the 200-day moving average didn’t turn lower until two weeks after the death cross appeared.

But this is not the only indicator pointing to trouble ahead. Even while we have many stocks hitting 52-week highs, we also have an extraordinary number hitting 52-week lows. This is called a “split market”, and this is a very ominous sign. In fact, according to Peter Boockvar 62 percent of all stocks on the New York Stock Exchange are already trading below their 200-day moving average…

Peter Boockvar, market strategist at Lindsey Group, said he believes the market is in a correction that began a few weeks ago, starting with commodities names getting hit. The small-cap Russell 2000 was also a leader of the declines. “The key is it’s infecting other areas of the market. You have every headwind and every reason to continue this correction,” he said.

“Going into today, 62 percent of the NYSE stocks were trading below the 200-day moving average,” said Boockvar. “More and more companies are dropping out of the bull market.”

At this point, we have already had more than 50 “split days” this year. King World News has just released an article which has pointed out this has only happened four times before, and a major stock market crash has followed each occurrence…

The only other times in history we’ve seen more than 50 split days during the past year were March 1968, August 1972, October 2000 and July 2006.

After all four of those, stocks lost more than a third of their value at some point during the next two years.

Are you starting to see?

A stock market crash is coming.

Another thing that has investors concerned is the fact that we have seen a large divergence between high yield credit and stocks. As Bloomberg has pointed out, when this happens a significant stock market decline follows more than 70 percent of the time…

While not without precedent, instances when anxiety in bonds didn’t seep into equities are rare. More than 70 percent of the time since 1996, as spreads widened as much as they have since April, the S&P 500 has fallen, with the average decline exceeding 10 percent, data compiled by Bloomberg show.

“This is something that sooner or later is going to impact the stock market,” said Russ Koesterich, global chief investment strategist at New York-based BlackRock Inc., which oversees $4.7 trillion. “Credit market conditions have not been benign and easy as where they were last summer.”

On top of everything else, it looks like a global currency war could be erupting.

According to USA Today, this desperate move by China to devalue the yuan may indicate that the Chinese economy is in far worse shape than most had thought…

One, China’s move suggests that its economy is in worst shape than believed. “It highlights the fragility of the global economy,” says Donald Luskin, chief investment officer at TrendMacro. Second, a weaker yuan means a stronger dollar, and a stronger dollar means U.S. products sold in China are more expensive, which means fewer sales of Apple iPhones, hotel rooms offered by Wynn Resorts and computer chips made by Micron Technology.

Lastly, there is a fear that other nations will respond to China by devaluing their own currencies to stay competitive.

“When people start talking about ‘currency wars,’ it’s never a good thing,” says Michael Farr, president of money-management firm Farr, Miller & Washington. “China’s move to devalue its currency could be the first shot across the bow towards a wider currency war.”

As I discussed yesterday, it seems like the phrase “currency war” has been thrown around a lot lately.

But what would that look like, and what would that mean for the global economy?

Well, former IMF economist Stephen Jen is suggesting that we could soon see major currencies all over the planet being devalued by up to 50 percent…

[The] devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil’s real to Indonesia’s rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen.

Volatility measures were already signaling rising distress in emerging markets even before China’s shock move. An index of anticipated price swings climbed above a rich-world gauge at the end of July, reversing the trend seen for most of the past six months.

The surging U.S. dollar combined with crashing prices for commodity exports has already created a state of crisis in South America. If emerging markets such as Brazil are forced to devalue their currencies to stay competitive with nations such as China, that is going to just exacerbate the problems.